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Strong house price rises continue in Czech Republic

Czech house prices are rising strongly, as demand continues to outstrip supply. The average price of apartments in the Czech Republic surged by 8.75% (6.21% inflation-adjusted) during the year to Q3 2018, after y-o-y rises of 8.06% in Q2 2018, 7.57% in Q1 2018, 8.42% in Q4 2017 and 12.53% in Q3 2017, according to the European Central Bank (ECB).

During the first half of 2018:

The average price of new dwellings soared by 13.23% (10.72% inflation-adjusted), according to the Bank for International Settlements (BIS) - almost 40% higher than the previous Q3 2008 peak.

The average price of existing dwellings rose by 6.73% (4.36% inflation-adjusted) from a year earlier, or 22.7% above the previous Q3 2008 peak.

The strong growth was mainly driven by the country's favourable lending conditions, a growing economy, and rising real wages.

This was supported by figures from consultancy Deloitte, showing sales prices of flats in Czech Republic's regional capitals, including Prague, rose by 10.1% in Q3 2018 from a year earlier, to an average of CZK 56,800 (US$ 2,500) per square metre (sq. m.).

In Prague the average price of flats increased 6.5% y-o-y in Q3 2018, to CZK76,500 (US$3,366) per sq. m., according to Deloitte. Prague accounts for about two-thirds of the country's total property sales volumes.

Demand remains strong. In the first half of 2018, about 2,817 apartments were sold in new buildings and fully refurbished projects in Prague, up from sales of just below 2,500 units in H2 2017, according to Jones Lang La Salle.

“Demand has been driven mainly by migration within the country and strong demand for prime properties by foreigners; demand for investment properties is also believed to play a significant role,” according to a 2018 report released by the International Monetary Fund (IMF).

Residential construction activity is increasing rapidly, but is still below peak levels. In 2018, dwelling completions rose by 18.5% to 33,868 units from the previous year, following annual increases of 4.6% in 2017, 8.9% in 2016 and 4.8% in 2015, according to the Czech Statistical Office (CZSO). Likewise, dwelling starts were up 5.1% to 33,121 units in 2018.

“Demand has consistently outstripped supply, especially in Prague,” said the IMF. “Planning and zoning laws contribute to housing supply constraints that add to pressures on prices. Some progress has been made in streamlining procedures for building permits, but construction levels remain below pre-crisis highs.”

The Czech Republic's housing market is expected to remain tight in the coming years, with house prices projected to continue rising strongly.

The Czech economy is believed to have expanded by 3% in 2018, and is expected to grow further by another 3% this year, according to the IMF.

Poor yields in Prague

Prices of houses and apartments in the Czech Republic have begun to rise again, according to Czech National Bank statistics. Wonderfully beautiful Prague is quite an expensive city in which to buy property:

a 120 square metre (sq. m.) apartment in Prague will cost you around 460,000 euros

a70 sq. m. apartmentin Prague will cost you around 260,000 euros

The purchase price of apartments in Prague’s prime residential districts is now around 3,500 euros to 4,000 euros per sq. m..

How much will you earn? Prague’s rental yields are weak:

a 120 square metre (sq. m.) apartment in Prague can rent for around 1,500 euros per month, earning a yield of around 3.7% a month

a70 sq. m. apartmentin Prague can rent for around 780 euros, earning a yields of around 3.6% a month

Currency risk. Over the past two years, the Czech Koruna has flat-lined against the euro.

Conclusion: You’re not going to buy in Prague for yields, at the moment!

Total transaction costs are moderate in the Czech Republic

Roundtrip costs in the Czech Republic are moderate at around 7.51% to 10.02% of the purchase price of the property. The buyer pays around 2.5% to 5% of the transaction costs. The seller pays the real estate acquisition tax at 4%.

Modest economic growth; record-low unemployment

The Czech economy is believed to have expanded by 3% in 2018, and is expected to grow further by 3% this year, according to the International Monetary Fund (IMF).

The Czech Republic enjoyed an average growth rate of 6% from 2004 to 2007. GDP fell by 4.8% in 2009 but bounced back immediately in 2010, registering growth of 2.3%, followed by 1.8% in 2011. However, the economy fell in recession in 2012-13 due to weak domestic demand.

An economic recovery in 2014 was followed by healthy expansions of 5.3% in 2015, 2.5% in 2016 and 4.3% in 2017, thanks to increased private consumption and robust growth in the real estate market.

In 2018, the government unexpectedly recorded a budget surplus of CZK 2.9 billion (US$129 million), the second best result since 1996, according to Finance Minister Alena Schillerová, thanks to higher tax and social insurance collections. The surplus is equivalent to about 0.1% of GDP last year.

Unemployment in the Czech Republic reached a record low of 2% in Q4 2018, down from 2.3% in the previous quarter and 2.4% a year earlier, according to the CZSO.

Inflation rose to 2.5% in January 2019, up from 2% in both November and December 2018, according to the CZSO. This increase was still within the CNB’s target range between 1% to 3%. Inflation is expected to remain within target this year.